Tuesday, July 27, 2010

First of all, anyone reading this blog should get off his or her ass and go to New Orleans. It is the most amazing place in America. I was down there last week. There is of course the food and the music. But the museums are also extremely good. The National World War II Museum is remarkable - one of the best historical museums I have ever been to. They have a film narrated by Tom Hanks (who seems to have staked out some kind of personal ownership interest in WWII) that goes a bit over the top in its special effects on occasion, but on the whole, is extremely moving. The collection of artifacts from the war is also fascinating, including a handwritten version of the statement that Eisenhower prepared apologizing to the American people in case D-Day turned into a fiasco.

The battlefield cite in nearby Chalmette (War of 1812) is also worth a visit. While I've never been much of a fan of Jackson, I must say that the Agincourt-like casualty numbers (over 2,000 British casualties and only 71 American casualties) are truly remarkable. Interesting that prior to the Civil War, January 8, the date of the battle, was a national holiday.

By the way, the reason why the WWII museum is located in New Orleans is in honor of Andrew Higgins, founder of Higgins Industries in New Orleans that had manufactured boats capable of operating in shallow waters in the bayous. Higgins designed the landing craft used at D-Day. Eisenhower once commented, "Andrew Higgins is the man who won the war for us." The design of the landing craft made it possible not only to land massive numbers of soldiers on the Normandy beaches, but also to land heavy equipment such as trucks and tanks directly on the beaches. D-Day was a first in this respect. In prior amphibious landings, it was necessary to capture a nearby port, where heavy equipment could be off-loaded. The design of the "Higgins Boats" enabled them to carry heavy loads in shallow water and thereby made it unnecessary for the Allies to capture a French port city in order to bring heavy equipment ashore.

Another museum that my son and I visited in NOLA was the African-American Museum located in the Treme section of the city. Treme is the historical center of African-American culture in New Orleans, and is generally considered to be the birthplace of jazz. Nearby Congo Square in Louis Armstrong Park was the only place in the ante-bellum South where Africans were permitted to perform their traditional songs and dances. The neighborhood originally consisted of a series of plantations that were bought up by Claude Treme in the late 18th Century, who subdivided the land to provide homes for the many free persons of color living in New Orleans.

The museum is centered in a beautiful mansion that was part of one of the original Treme plantations. The exhibits at the museum are actually housed in three separate houses, all connected by a very pleasant courtyard. The collections are fascinating, including some rather grisly relics of slavery such as grotesque wrought-iron neck collars and advertisements for slave auctions that sound a bit too much like some sleazy advertising pitch for Ginzu knives or land in Arkansas that you will likely hear late at night on cable TV. It is always worth remembering that all of this was going on in America less than 150 years ago, without most white Americans having much of a problem about the whole thing.

The exhibit included some portraits of the African-American Senators and Congressmen who were elected in the South during Reconstruction. As I looked at the faces of these proud, confident men (unfortunately they were only men) I was struck by the incredible human devastation brought about by our legacy of racism. After the "compromise" (sell-out) of 1876 that resulted in the withdrawal of Union troops from the South, these men were all removed from office. They spent the rest of their lives terrorized by the Klan. Many ended up in jail on trumped-up charges. Others were killed.

I asked my son if he thought that there was any way that Reconstruction could have been carried out differently, so that African-Americans could have been integrated into American society then and there, making the outcome of the Civil War much more meaningful. My son said that he doubted it, since it would have required a Union military occupation of the South that probably would have had to go on for decades. Very few in the North had the kind of commitment to the rights of African-Americans to support such a long-term occupation. My son was of course right. But as soon as he said it, a very familiar bell went off in my head.

Dedicated readers of this blog (are there any?) are probably familiar with my fascination with the writings of military theorist Thomas P.M. Barnett. To recap the basics, Barnett's principal thesis is that military operations should viewed as having two distinct aspects. The first is what Barnett calls the "Leviathan" phase, which is essentially what we traditionally think of as "war." The second is what Barnett calls the "sysadmin" phase, which is essentially a "postwar" operation. Barnett's thesis is that in the 21st Century, the goal of most warfare will be to "shrink the gap", which means integrating more and more of the world into the global economy. Barnett's contention is that most conflict in today's world emanates from the "gap", namely the parts of the world that remain unconnected to the global economy, so strengthening connectivity must be the goal of America's global security strategy. This can only be accomplished through successful "sysadmin" operations. Most importantly, Barnett emphasizes that if a war is undertaken without due consideration of what will be required in order to carry out an effective postwar "sysadmin" operation - a process that is likely to be protracted, expensive and labor intensive - it is highly unlikely that the original goals that initiated the war can be achieved.

In thinking about the failure of post-Civil War Reconstruction, it seems to me that Barnett's analysis applies. At one level, the North fought the Civil War for the narrow and specific goal of preserving the Union. However, if we dig down to a deeper level, we have to ask why it was necessary in the first place to pursue a very destructive and bloody civil war in order to preserve the Union? The answer is fairly obvious to me. The South had evolved into a society which was in virtually every aspect - social, economic, cultural - built upon the institution of race-based slavery.

Thus, the North could on a surface level obtain a military victory over the South, as it did, and thereby achieve the narrow objective of preserving the Union. However, if the North wanted to do anything about the underlying forces that had caused the Union to break apart so violently in the first place, it would have had to address the problem of re-making Southern society. And that would have meant dealing with the issue of race in a big way by fostering the full integration of African-Americans into the economic, political and cultural life of America. To do that, the North would have had to have been prepared to "shrink the gap", that is, carry out a real-live Barnettian "sysadmin" operation, including a long-term occupation of the South by Union troops, in order to fully connect the South, including the African-American population, to the economic, political and social life of America.

As it turned out, the North had no stomach for such a long-term occupation of the South. Instead, the North basically adopted what in some circles has been characterized as the "cut and run" strategy. Following the election of 1876, Northern politicians entered into a corrupt bargain with the traditional Southern elite, which only a few years earlier had been the leadership of the greatest act of treason in U.S. history. The North accepted Jim Crow laws that kept African-Americans in a legal status that was only a marginal improvement upon slavery; the North did nothing to foster the economic development of the African-American community; and the North agreed to tolerate the actions of terrorist organizations such as the Klan designed to oppress the African-American population and maintain a culture in the South grounded in the principle of white supremacy.

We have been living with the consequences of the corrupt bargain of 1876 ever since. If nothing else, the racist bleating that seems to have been emboldened by the election of President Obama should remind us that a belief in white supremacy remains strongly entrenched in too much of this country.

As we contemplate America's future course of action in Afghanistan, we have to wonder about the consequences of any kind of future "deal" that would leave the Taliban in power. Would we be repeating the events of 1876? Would we be leaving the door open to generations of oppression, genocide and terrorism? Perhaps we need not look beyond our own history for the answers.

Rep. Duncan Hunter (R-Alpine) says the federal government should deport U.S.-born children of undocumented immigrants.

"Would you support deportation of natural-born American citizens that are the children of illegal aliens," Hunter was asked. "I would have to, yes," Hunter said. "... We simply cannot afford what we're doing right now," he said. "... It takes more than just walking across the border to become an American citizen. It's what's in our souls. ..."

Hunter made his comments at a "tea party" rally in the San Diego County city of Ramona over the weekend.

Fortunately, we do have something called a "Constitution" in this country, and it unambiguously prohibits what this unspeakable ignoramus Hunter is proposing. The Fourteenth Amendment specifically provides,

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.

So, I think we can all rest pretty well-assured that this raving lunacy can be dismissed as nothing more than that, the ravings of a bunch of lunatics. Still, the headline hit me in a very personal way. You see, if Mr. Hunter had his way, I wouldn't exist.

My grandparents emigrated to the United States from Wales in 1910. At the time, the United States had no restrictions on immigration. My grandparents were among the millions who came through Ellis Island looking for something better. They were recently married and they liked the idea of starting a family that had real prospects of living better than their parents had. They settled down in Upstate New York having two children, the younger one being my mother.

After the end of World War I, they started to get a bit nostalgic for the "old country." They missed their relatives. They missed the beauty of the hills of North Wales. So they decided to go back, taking their two young children with them.

It didn't take very long for them to remember why they had left Wales in the first place. There was no work to be found. As my grandfather always used to say, "You can't eat scenery." My grandmother had been slated for a life "in service" working in an estate owned by local aristocrats. The prison that is the British class system was opening its gates to welcome them back. They soon realized that they had made a dreadful mistake.

In the interim while they were away, the United States had passed its first laws imposing restrictions on immigration. When they sailed back past the Statue of Liberty, it was no longer clear that the "golden door" was going to be open for them. Fortunately, my mother and her brother had been born in the United States, so under the Constitution, they were citizens of the United States. Unlike Mr. Hunter, immigration officials in those days understood that that meant something. My mother and her brother could not be excluded from their country, and the family was allowed to return.

My mother went on to grow up during the Roaring Twenties, go to college and get a job, fall in love with and get married to a handsome and thoughtful man, make it through the Depression and the War, and raise a family of her own. Thanks to the Constitution, I am now sitting here writing this blog.

But I guess that Mr. Hunter would say that my mother wasn't a real American, at least not in her "soul." I shudder to think what is in Mr. Hunter's "soul".

Thursday, March 25, 2010

I recently finished reading A Failure of Capitalism by Richard Posner. It is really a very good book, one of the best things I have read about the recent financial crisis. I recommend it highly to anyone who wants to understand how this all happened, and get some insight into the kinds of reforms that might make sense as a way of preventing a recurrence.

Before getting into the basic ideas of Posner's book, a bit of background. Posner is a Judge on the United States Court of Appeals for the Seventh Circuit, located in in Chicago. He is regarded as a leading libertarian conservative who was often on the "short list" of possible Republican nominees to the Supreme Court (although his generally libertarian instincts might make his positions on social issues unacceptable to the religious right). Generally speaking, he is not someone with whom I would ordinarily find a lot of ideological common ground (I once clashed with him in print over something he wrote about one of my cases). Before being appointed to the Federal Bench, Posner was a Professor at the University of Chicago law school, where he was one of the founders and leading proponents of the "law and economics" school of legal thought. This legal philosophy attempts to apply the libertarian economic philosophy of Milton Friedman and other leading lights of the Chicago school of economics to legal analysis. In essence, it is a legal philosophy grounded in principles of laissez faire economics.

Given Posner's intellectual background, A Failure of Capitalism is a remarkable work. It is, almost, a mea culpa for the financial collapse. Posner shows with clear-headed and irrefutable logic that the financial collapse and resulting economic depression - yes, Posner calls it a depression because of the potential danger of deflation, and not just a recession - is attributable to the failure of the U.S. government adequately to regulate financial institutions. The prime culprits in this debacle are (a) the Federal Reserve, particularly under the leadership of Alan Greenspan, at first for failing to recognize the existence of the real estate "asset bubble", and later for assuming that "market forces" would work everything out and that the financial system would correct itself without government intervention; and (b) the political leadership of both parties, including President Clinton and the Republican Congress, for enacting the Gramm-Leach-Bliley Act of 1999, which repealed the Glass-Steagall Act without implementing any alternative regime for regulating the financial industry.

Posner's step-by-step economic analysis of the forces that led to the collapse is a tour de force. I must confess that Posner's grasp of technical economic analysis exceeds my own; I could follow it as I was reading it, but I would be hard-pressed to reproduce it. In summary, Posner disposes of the many myths that have sprung up about the origins of the financial collapse:

1. Posner demolishes one of the right-wing's favorite hobby horses, namely, the claim that the Community Reinvestment Act was responsible for the financial collapse by promoting subprime mortgages for unworthy borrowers. In fact, this Act had a very limited scope and it had almost nothing to do with the events that led to the financial meltdown of 2008.

2. Posner offers a nice rejoinder to the conventional assertion that the financial collapse was attributable to too much "greed" on Wall Street. Posner argues that "Wall Street" acted exactly the way it is supposed to act, and that blaming the financial collapse on "Wall Street greed" would be like blaming a lion for killing a zebra - it is the nature of the beast. It is precisely for that reason that the government must regulate financial markets, and again, Posner demonstrates that the collapse was clearly the result of a massive regulatory failure.

3. Posner also dismantles the claim that the collapse was attributable to irrational, panicky behavior by financial institutions. Again, Posner's meticulous economic analysis shows that at every step of the way, financial institutions acted rationally, exactly the way you would expect them to act as rational profit-maximizers in a "free market" system - and that rational market-based behavior nevertheless resulted in a meltdown of the financial system.

In sum, Posner concludes that the financial collapse was attributable to the mistaken belief that markets are always self-correcting; that if financial institutions are left to their own devices such that market participants can act in an unregulated rational profit-maximizing manner, an end-result beneficial to society will be achieved; and that any form of governmental regulation is not only unnecessary, but harmful. Posner shows just how wrong these beliefs have proven to be, and that to the contrary, governmental regulation of the financial industry is essential. Having come to this realization, Posner therefore describes the financial collapse as "a failure of capitalism." It is here, however, that I part company with Posner.

By characterizing the financial collapse as a "failure of capitalism" Posner is accepting the idea that "capitalism" is at odds with government regulation. By promoting the very notion that the "free market" can be set up as something inconsistent with government regulation, so-called "libertarians" - often including Posner himself - have done the public an enormous disservice. The idea that capitalism is something that can exist without government regulation, and that any form of government regulation is inherently destructive of capitalism, is an idea that originated with the Austrian economists Ludwig Von Mises and Friedrich Hayek, got promoted in the U.S. by Milton Friedman and the rest of the Chicago school of economics, was popularized and dumbed-down in the trashy novels of Ayn Rand (of whom Greenspan was a devotee), and ultimately worked its way into mainstream politics through Ronald Reagan and Margaret Thatcher, who always spat out the word "government" as though it were the foulest sort of cuss-word imaginable. The consequences of this fundamental misunderstanding of the nature of capitalism have been dire indeed, ultimately bringing about the global financial meltdown of 2008, as Posner so forcefully demonstrates.

In many respects, it is a mistake to think of capitalism as an "economic" system at all. In reality, it is a legal/political system. Markets do not exist in a state of nature. Markets exist because governments establish laws and rules that make market transactions possible. Government is not the enemy of the free market; government is the creator of the free market.

To illustrate this, let's consider a very simple example of a market transaction that can be found in one version or another in virtually every basic economics textbook. Buyer wants some widgets; Seller has some widgets. They get together and they consummate a transaction at a price determined by the supply of available widgets and the demand for widgets among consumers. While this simple example might be helpful in understanding the principles of supply and demand, it only works in the Garden of Eden where widgets are simply lying about and nothing has to be done to produce them. The example has very little relevance to understanding the actual operation of capitalism.

Assume that Buyer wants widgets and Seller knows how to produce widgets and has the means to do so. Once again, they shake hands and agree upon a transaction at a price for the widgets determined by supply and demand. It will take about thirty days for Seller to produce and deliver the widgets. Suppose that as the thirtieth day approaches, something has happened that has affected the supply and demand for widgets, e.g., a war has broken out; or there has been a natural disaster; or there is a new craze making widgets more popular; or conversely evidence has come to light that widgets may cause cancer making them very unpopular; or there has been some technological breakthrough that makes it much cheaper to produce widgets, etc., etc. On the thirtieth day, Buyer may decide he no longer wants the widgets or at least he doesn't want them at the agreed-upon price, or on the other hand, Seller may decide that he no longer wants to sell the widgets at that price. If Buyer and Seller knew that all of these eventualities could happen and that the other side might renege on the deal, they probably would not have entered into the transaction in the first place. So, the government has to step in and set up a bunch of rules to determine when agreements between buyers and sellers either are or are not enforced. That is called the law of contracts, and without it, capitalism cannot exist.

Most libertarian conservatives would agree that it is appropriate for the government to enforce contracts and property rights, but not to do much of anything else. This restriction on the scope of appropriate governmental action, however, is entirely arbitrary. Indeed, it does not take very much imagination to see that there is a plethora of reasons why the government must be actively involved in laying out and enforcing rules in order to enable capitalism to work. Going back to my simple example of Buyer, Seller, and their widgets:

- Suppose Seller has built a factory to produce these widgets, but there are armed gangs roving the neighborhood who are threatening to damage the factory if Seller does not pay them protection money, which may make it difficult to deliver the widgets in thirty days. The government now has to step in and enforce some criminal laws.

- Suppose Buyer isn't sure that Seller is the best producer of widgets, so Seller gives Buyer some information about the quality of his widgets. It turns out that Seller's widgets are actually of very poor quality and that the information Seller gave to Buyer was not true. We now need the government to enforce some consumer protection laws.

- Suppose the workers in Seller's widget factory are not happy with the wages they are being paid and they want to form a union so they can get into a stronger position to negotiate with Seller. The workers are threatening a strike, which again may affect Seller's ability to deliver the widgets within thirty days. We now need some labor laws.

- Suppose Buyer has gone around and worked out a secret deal with everyone who might be in the market to buy widgets to ensure that no one will pay more than a particular price for widgets. Welcome to antitrust law.

- Suppose these widgets do cause cancer, and ultimate consumers of the widgets would like to get some redress against both Buyer and Seller for the damages they suffer. We now need products liability laws.

- Suppose Buyer and Seller are both concerned that they are going to be held liable for damages caused by the widgets, and if they are going to continue in this business, they'd like to do it in a way that limits their personal liability. Corporate law now comes into the picture.

- Suppose Seller decides that having set up a corporation to own and operate his widget factory, he can vastly expand the factory by soliciting additional investments in the corporation from members of the investing public. We now need a law of securities regulation.

- Suppose that the government that is making and enforcing all of these rules needs some money to fund itself, and it decides that it is appropriate for Buyer and Seller to bear some of the cost of operating the government. Now we need tax laws.

Obviously, I could go on spinning off examples like this for some time - indeed, law school is generally a three-year program. However, even this very simple example shows how absurd it is to think of capitalism as a system that can possibly exist without government regulation. The Reagan/Thatcher formulation of "markets good, government bad" is just childish poppycock - poppycock that has done a great deal of damage.

Thus, the concept of regulation vs. de-regulation represents a false choice. It is inevitable that you are going to have some kind of regulation in any capitalist society. The real question is whether you are going to have regulation that works as opposed to regulation that doesn't. The ultimate test is relatively simple to state, but very difficult to implement in practice: good regulation enables markets to function efficiently.

In an earlier post, I set forth the view that no one can seriously put forward the argument that socialism is a viable alternative to capitalism as a model for organizing a society's economic activities. http://democraticcore.blogspot.com/2009/04/brief-history-of-socialism.html The mistaken belief that any form of governmental activity is the equivalent of "socialism" is really the flip-side of the mistaken belief that "capitalism" means the absence of governmental activity.

So, Judge Posner, while you have written an outstanding book, I take issue with your title. It was not a "failure of capitalism" that nearly destroyed the global financial system; it was a failure to understand that capitalism necessarily requires governmental regulation in order to function.